Covered Call Backtest

From our friends at ORATS (which provide Slope with great options data) we ran a large backtest to identify the best maturity, delta, call value as a percent of stock price, earnings strategy, and implied volatility profile for call selling on S&P 500 components.

The Test

Symbols used in the test were MSFT, AAPL, AMZN, PFE, JNJ, T, GOOG, BRK-B, JPM, V, PG, UNH, INTC, VZ, HD, MA making up 30% of the S&P 500 weighting.

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Days to expiration (DTE) used were 10, 15, 20, 30, 45, 60, 90, 120, 180, 240 days to expiration.

Deltas tested were 5 to 50 by 5 deltas.

IV Percentile and Skew/slope Percentile tested were under 33%, between 33% and 66%, under 66%, over 33% and over 66%.

Call market price as a percent of stock price tested were 0.5%, 1%, 1.5%, 2.0% and 2.5% and no filter. We call this Spread Yield%.

Exiting after 75% profit is made and no early exit were tested.

Avoiding earnings by trading out before the announcement was tested along with trading through earnings.

In all, there were 3.5 million combinations of the above parameters run back through 2007 and here are the results.

Results

The best maturity was 30 days to expiration and best delta was 0.10.

Avoiding earnings was better than trading through earnings.

Holding to expiration was better than exiting after profit.

A call value of a percent of stock price that was best was 2.0%.

The best use of IV percentile and slope was selling a call when the IV percentile was above 66%. Slope percentile was not important for identifying the best calls to sell.

Implementation

Scanning for the above parameters is easy using the ORATS web tool.

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Trading through our brokerage APIs such as Tradier or Thinkorswim is made possible.

Monitoring fills can be done to see if the market goes against the trade to cancel is available.

Paper trading is available through Tradier brokerage.

Position tracking and exit alerts along with delta and profit can be found in our Risk web tool.

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Disclaimer: This is not meant to be a recommendation to buy or to sell securities nor an offer to buy or sell securities. Before selling or buying any stock or other investment you should consult ...

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